Hire-Purchase Agreement

This Packet Includes:

1. Description and Instructions; and

2. Hire-Purchase Agreement

Description and Instructions

Hire-Purchase Agreement

A Hire-Purchase agreement is governed by the provisions of Chapter IX of the Indian Contract Act. The common day finance agreements like purchase of consumer durables like motor vehicles, computers, household appliances like televisions, refrigerators etc. are usually covered under this Act. In the Industrial sector purchase of machinery and equipment etc. is also financed by this method of Hire-Purchase.

In a hire-purchase agreement, the owner hires goods to the hirer with an option to purchase the goods when he has made the payment of a certain sum. This enables the purchaser who is unable to pay the full price of the asset at one lump sum to acquire an asset and after making the payment of an initial amount called a premium or deposit, the purchaser pays the balance consideration money in instalments. After the payment of all the instalments, the property in the goods passes to the hirer. The hirer has an option to return the goods during the period of hire. In a Hire-Purchase Agreement, the hirer has the right to terminate the agreement for hire for convenience without having to pay the value of the goods.

For a Hire-Purchase agreement or transaction to be valid it must be a bailment transaction, in other words the hirer is given the right to purchase the goods on certain conditions. This, however, is an option not an obligation to purchase.

Hire-Purchase Agreements are treated as distinct from conditional sale, since it provides the hirer with an option to buy, and does not impose an obligation to buy as a conditional sale provides for. The usual option to buy in a Hire-Purchase transactions is for a nominal price of Re.1

Hire-Purchase Agreements should NOT be confused with a Leasing Agreement. The difference between the two is principally the non-existence of option to buy in case of lease transactions. This may lead to differences in taxation treatment, but there is no appreciable difference in legal rights of parties.

NOTE: Motor vehicles law in India contains specific provisions relating Hire-Purchase transactions. In respect of all motor vehicles, registration with motor vehicles authorities is compulsory. The motor vehicle is given a registration certificate, which contains the name of the "owner". Owner, for the purposes of the motor vehicles law, is defined as the person effectively using the asset- obviously therefore, the name of the lessee/hirer is reflected as owner there. The owner permits the hirer to have the registration of the said car in his own name in terms of the provisions of Motor Vehicles Act, 1988.